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The “Outsourcing1” Issue: Good or Bad for Workers? � D2 Digest

Effect on employment

In the short term, negative. When a company outsources, domestic workers lose their jobs. This may be “frictional” unemployment, but it’s nasty if it happens to you. And in a recession “frictional” unemployment lasts longer, because employers take their sweet time to reinvest the money they save by outsourcing. It’s not good enough to pretend that short-run costs don’t exist.

In the long term, negligible. The domestic level of employment is a result of monetary policy, not trade policy. All previous scares about trade destroying jobs have proved to be bollocks, so these will too.

Effect on wages

There are two effects at work here:

If outsourcing improves the division of labour and increases national income (if the money saved by capitalists is reinvested at a profit), then it should be good for wages in the long term, as wages tend to rise in line with national income.

In the short term, outsourcing decreases the bargaining power of domestic workers, which is bad for wages. Particularly in an economic environment in which the labour market is slack and seemingly getting slacker.

More efficient technologies tend to increase wages. Union-busting decreases wages. Outsourcing has elements of both, so it is hard to say which effect will prevail. My guess is that in the long run, labour has always got its share of the returns to productivity improvements and so it will this time. But the short run (see above) could last a long while.

DD sez: It seems to me that, in principle, and in the long run, outsourcing is a form of trade and should be supported for all the reasons that trade should be supported. However, I certainly don’t propose to make that argument in front of a gang of recently-outsourced workers and nor should anyone else. There are real social costs to any technological revolution which should not be ignored. In general, society doesn’t internalise these costs to the companies in order to provide an implicit subsidy to innovation, but I am unsure that this subsidy is merited in this case. I haven’t tackled questions of international equity here; they are obviously important.

1In reality, “offshoring”. The jobs in question are not always being moved out of a company, and it is possible to outsource jobs without also offshoring them. But give up, this linguistic battle has been lost and “outsourcing” was a pretty nasty neologism anyway, so it’s not ground worth fighting over.